Over the past decade, pension schemes in all shapes have been cranking up allocations to illiquid assets. UK DC schemes have been relatively slower to venture into the illiquid space, evidenced by a survey commissioned by the Department for Work and Pensions which found two-thirds of DC schemes do not currently invest in illiquid assets.
Yet, with long-term investment horizons, DC schemes are well placed to harness any potential illiquidity premium on offer. The government, Financial Conduct Authority and Bank of England have been working in concert over the past year to pave the way into illiquid assets for DC investors. The Productive Finance Working Group recently published a series of guides designed to enhance trustees’ knowledge and understanding of illiquid vehicles. It is also now a requirement for scheme trustees to include a formal policy on illiquid investments in their chairperson’s statement.
The scene is set for a weighty increase to illiquid assets – but what are the potential pitfalls, and how should DC schemes adjust portfolios to optimise their risk-adjusted returns while being mindful of their resilience?